Here’s why BAT stake sale may not impact ITC, feel analysts

BAT’s move to monetise some of the shareholding in well-performing ITC is rooted in several headwinds that they have faced in recent years. Its share price slid around 23 percent over the last one year. As per analysts, their challenges stem mostly from the estimated low single digit organic revenue growth, elevated debt, significant underperformance in the US cigarette market, slowing growth/break-even in new categories, lower returns to shareholders and a series of regulatory settlements against the Group. High interest rates have also increased the cost of capital and finance costs for the Group. Their aggregate debt of around £40 billion, makes up nearly 33 percent of its balance sheet. Also, as per BAT, they are yet to receive regulatory approval which usually takes a long time.

The immediate need for cash has undoubtedly compelled BAT to look at reducing its stake in ITC.

Following its December Quarter Three results for FY24 announced on January 29, 2024, analysts have reaffirmed their strong outlook on ITC. Motilal Oswal Financial Services had a buy rating with a target price of ₹515. Many other analyst firms have also provided an optimistic growth outlook for ITC. However, ITC’s stock recently faced an avoidable overreaction from some investors following the BAT indication to reduce their shareholding for immediate cash requirements.

Following the recent ITC Investor Meet on December 12, 2023, investment bank Goldman Sachs emphasised in its report that the FMCG business stands as the primary long-term growth catalyst for the company. The report projects a substantial margin expansion for the ITC businesses over the next five years. The company has demonstrated a commendable transformation in capital efficiency and cash generation from FY18 to FY23, fundamentally transforming its ROCE across non-cigarette businesses.

BAT had highlighted in recent media interactions that their stake in ITC is not just a financial investment but a strategic one. They clarified that holding more than 25 percent shareholding is not necessary for them to exert strategic influence, including veto rights. With a 29.03 percent stake, BAT is the single biggest investor in ITC.

BAT’s intention to monetise some shareholding beyond 25 percent is not a new development and aligns with their previously expressed intentions. While acknowledging ITC’s strong performance and future growth potential, BAT had stated that they recognise their significant shareholding offers an opportunity to release and reallocate capital.

JP Morgan, in its commentary on the ITC Q3 FY24 result, talked about the company strengthening its competitive position in various FMCG categories. The company is benefitting from expanded distribution reach, a stronger e-commerce presence and notable innovation intensity.

ITC posted a standalone net profit of ₹5,572 crore for the December quarter of FY24, marking an 11 percent increase from the ₹5,031 crore recorded in the corresponding quarter of the previous fiscal year.

With accelerated growth in the past five years, ITC achieved a remarkable 37% margin last year with a Rs. 70,000 crore top line. The overall revenue witnessed an 11 percent CAGR from FY18 to FY23, along with a corresponding 11 percent CAGR in overall PAT during the same period. The FMCG segment demonstrated exceptional performance, with a 19.6 percent increase in segment revenue and robust 34.9 percent growth in segment EBITDA, despite challenges posed by elevated commodity prices.

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Published: 12 Feb 2024, 10:13 PM IST